Prompt Corrective Action (PCA) framework

Why in news?

• The RBI on 2^nd November issued a revised Prompt Corrective Action (PCA) framework for banks to enable supervisory intervention at appropriate time and also act as a tool for effective market discipline.

About PCA:

• Prompt Corrective Action or PCA is a framework under which banks with weak financial metrics are put under watch by the RBI.
• The RBI introduced the PCA framework in 2002 as a structured early-intervention mechanism for banks that become undercapitalised due to poor asset quality, or vulnerable due to loss of profitability.
• It aims to check the problem of Non-Performing Assets (NPAs) in the Indian banking sector.

Parameters:

• The PCA framework deems banks as risky if they slip below certain norms on three parameters:
  • Capital to risk weighted assets ratio (CRAR)
  • Net non-performing assets (NPA )
  • Return on Assets (RoA).
• It has three risk threshold levels (1 being the lowest and 3 the highest) based on where a bank stands on these ratios.

How it works?

• PCA helps RBI monitor key performance indicators of banks, and taking corrective measures, to restore the financial health of a bank.
• On breach of any of the risk thresholds, the RBI can invoke a corrective action plan.
• Depending on the threshold levels, the RBI can place restrictions on dividend distribution, branch expansion, and management compensation.
• Only in an extreme situation, breach of the third threshold, would identify a bank as a likely candidate for resolution through amalgamation, reconstruction or winding up.

Coverage:

• Previously, the PCA framework was applicable only to commercial banks and not extended to co-operative banks, non-banking financial companies (NBFCs) and FMIs. Now urban cooperative banks (UCBs) will also fall under its ambit.

PRACTICE QUESTION:

Which of the following statements is/are correct regarding ‘Prompt Corrective Action (PCA)’?

1. PCA framework is implemented by the RBI

2. It is applicable only to commercial banks

Select the correct answer using the code given below:

(a) 1 only

(b) 2 only

(c) Both 1 and 2

(d) Neither 1 nor 2

Answer